2. Price guarantees

For a windfarm or solarfarm high power prices can be attractive, if the regulator does not fully compensate its subsidy for the power-revenues. For a windfarm or solarfarm very low prices can be a major problem, especially if the subsidy is reduced, which is the case in certain regulatory markets. In certain cases, banks will demand minimum powerprices, extra equity or extra debt-service accounts to reduce the risk of low powerprices.

Ideally a windfarm or solarfarm would seek a price guarantee from its PPA offtaker. This would greatly increase the bankability of the project.

The difference between a PPA directly with an end-user and a traditional PPA with a retailing/reselling energy company is important for price guarantees.

A retailer needs to transfer the risk of power price increases to its own customers. Whether market prices are high or low is not so much the challenge for a retailer. The challenge is to buy low and sell high. Keeping a price risks on their balance sheet is expensive. Finding external parties for price risks, such as investment banks or insurance companies, is expensive. A retailer will find it very difficult to offer the windfarm or solar farm a reasonably priced price-guarantee.

An end-user such as a datacentre, an industrial company which produces goods or a major corporation may view the risk of price increases very differently. A high market price negatively effects the business of the end-user. Depending on the % of power in the end-product of the end-user this effect may be small or large. Vice versa a low market price positively effects the business of an end-user. An end-user is thus able to offer a reasonably priced price-guarantee.

Price guarantees for low prices can be offset with price guarantees for high prices, so-called “collar” with a ceiling and a floor. The price guarantees can also have a stop-loss with a floor-below-the-floor (and a ceiling-above-the-ceiling).

Important for any price guarantee is to quantify the risks, the costs and the value to both parties. Wind4ind can do this.